MillerCoors' and A-B's Different Styles

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ABI Zone President Luiz Edmond

FILED FEBRUARY 24, 2012

Dear Client:

MillerCoors and A-B have different styles, and they were on display at the Beer Summit this week. First, MillerCoors: Distinguishing MillerCoors from A-B on distributor issues, overcoming beer malaise compared to wine and spirits, and the power of premium lights were the major themes of MillerCoors president of sales Ed McBrien. In fact, one A-B distributor asked Ed if he would consider working for A-B. Later, A-B's Luiz Edmond deadpanned after I asked him if they were buying SABMiller, "Well, at least then Ed would work for us." Yes, it was that type of back-and-forth.

MCBRIEN: DECLINING INDUSTRY'S NO FUN. But first, let's go over some of the salient points that Ed made about being flat, fractured, and fast in the U.S. beer industry. He pointed out that by 2020, 40% of all legal drinking age beer consumers will be millienals, which is "bad news because millenials drink less beer than previous generations." And don't expect the economy to save us either. "While the unemployment rate could eventually recover to 6%, U.S. job creation at the lower end of the pay scale will stay stagnant ...meaning tough times for blue collar beer drinkers," says Ed.

"Declining industries are no fun, and once you hammer out the cost savings that come from synergies and consolidation, it's tough to make money without growth."

WELCOMING INDIE CRAFT INTO THEIR DISTRIBUTORS. So how to get to growth? Ed has some ideas. First of all, he said that "rather than trying to limit or control other craft beers, MillerCoors should help distributors become the craft brewer's best friend," he says, clearly trying to draw a distinction between MC and A-B. "I want all of our distributors to have a powerful lineup of craft brands" so that they can "lead the dialogue at retail with us" with a strong portfolio, become more profitable so they can "invest for the long-term" and so that wholesalers with craft "can win back those indulgence and comfort occasions that today are going to wine and spirits."

And then he added pointedly, "This is America. The craft segment is not a zero-sum game. There is plenty to go around for everyone, and I don't mind competing head-to-head with any crafter brewer for the time and attention of our independent wholesalers." That turned some heads. Ed conceded: "Now, would I like to be the only supplier for our distributors? You bet. And I'd also like to weigh 175 pounds and have a full head of hair. That's just not the world in which we live."

NOT GETTING INTO BRANCHES. To further distinguish itself apparently from A-B, Ed said that MillerCoors has no interest in getting into branches. "If you look at just the MillerCoors network, we have nearly 100 fewer distributors than we had in 2008, and our wholesalers are getting bigger. The average house volume has increased nearly 50% over the last five years. (Ed Note: Nationally, the industry lost 218 distributorships over the same period). Ed noted that distributor gross margins are increasing, and operating profit as a percentage of net revenue has been growing at a 6% compounded rate.

"Now, the idea of a big brewer dipping its toe into that sizeable and growing profit pool is pretty tempting..... More money. More control. What's not to like?" Ed said, no, "that's not our model.....we're in the business of brewing and marketing great beer brands. We think that's a full-time job...especially in the most complex and sophisticated beer market in the world. Brewing and marketing are where we need to focus all our energy and all our resources." Plus, beer is a "local business...We'd much rather partner with local operators who are close to the market and have deep roots in the community."

THE DANGER OF SKU COMPLEXITY. Here are some "fun facts" as Ed calls them to explain why:

-In the MillerCoors system, the average distributor has gone from 270 SKUs in 2005 to over 500 in 2010.

-80% of total craft segment dollars come from just 7% of the SKUs.

-3% of craft SKU's accounted for 80% of total dollar growth in 2011?

MillerCoors tested a theory that less productive SKUs could be replaced with stronger items in their network. Ed says it worked and they rolled it out and cut 13% of their SKUs. Now, he says, the distributors should be doing this with the rest of their portfolios. He also pointed out that the average merchandiser's book has grown by 100% and he calls on more accounts than in the past. "It's not sustainable."

IMPORTANCE OF PREMIUM LIGHTS. A big portion of Ed's presentation centered on what he called the "800 pound gorilla in the room": Premium lights, and why MillerCoors believes that putting renewed focus on this segment pays a better return that focusing on crafts. "The #1, #2 and #4 beer brands in America are premium lights. Their collective GDP would place them among the top 40% of all countries around the globe," says Ed.

He adds: "And, our guys are loyal. In fact, they are more than twice as loyal as a craft drinker, and loyal drinkers are profitable drinkers. Brands matter and brands define the premium light segment.....The fact is premium light innovation works harder than new craft packs. The fact is premium lights are much more efficient on the shelf. The fact is premium lights react better to all kinds of merchandising, from feature through to display. And, the fact is premium lights deliver a much better GMROI...gross margin return on investment...... Accounts that backed away from supporting the premium light segment in favor of crafts are losing category penetration and loyal drinkers. Conversion rates go down. You lose trips. Total category volume declines and total profit falls flat. Premium lights give you the permission to sell crafts, not the other way around."

Ed said that at their convention in Las Vegas next month they will reveal "tighter, more relevant brand positioning" for their premium lights, "more differentiated advertising" along with packaging innovations that "break through." They will also show "stronger merchandising both on and off premise."

LUIZ EDMOND ON PLATINUM, PRICING, DISTRIBUTORS, AND MORE

ABI'S North American Zone President, Luiz Edmond, has a very matter-of-fact style. And at the Beer Summit he answered every question, even some tough ones, without pause.

I said that while most people can agree that the old A-B was bloated, some people have suggested that ABI has cut too much. Luiz responded: "We have the benefit of being a global company and can compare ourselves to companies in other countries. They have benchmarks. Seven years ago Ambev and Interbrew had a big transition. We were organized before we came here in terms of what kind of processes we liked and what kind of numbers we can deliver.....If we are under-sourced in some areas, we'll find out and we'll close the gaps. .... If we can increase efficiency without hurting the top line that's what we need to do and not the opposite. If we're cutting costs and at the same time hurting our profitability that doesn't make any sense. Sometimes we make mistakes and we go back and fix it."

LUIZ ON RAISING PRICING VERSUS LOSING SHARE. "Nobody likes losing share, we want to grow share. Yes, we had some losses, yes we increased prices ahead of inflation, but also when you look back in the last six or seven years, since 2004 or 2005 since the price war, it is also true that even in the years when we have no pricing or negative pricing the industry did not perform. It is sometimes easy to explain that the industry did not perform because of pricing but that's not necessarily true. In terms of share, I think we've suffered not only from the price but also from a lack of innovation. We came out of a very good year for us in the second half of 2008 and into 2009 -- with the Bud Light Lime rollout -- and we were the highest market share probably in the last ten years."

ON BUD LIGHT PLATINUM'S SUCCESS AND CANNIBALIZATION. "We will not learn that for the next six months, so we cannot react. It's been doing really well. It's a different attempt to go after different occasions..... It's difficult to say how successful we've been, but definitely more than we predicted in the business plan that we have.... I would say we are at the same speed or even better than Bud Light Lime for example. Cannibalization will always happen, we have almost 50% of the US market, it's so difficult to avoid cannibalization... anything that is below 50% cannibalization will be very good for us. Especially if you consider the brand's price is 15% or 17% higher than Bud Light."

ON A-B'S BRANCH STRATEGY. "We recognize there must be some [distributor] consolidation there in terms of scale .... and we will try to help speed up the process. Yes, we do believe in consolidation and yes we do believe we have a role to play... but in some cases, not in all cases, not in every market we will participate....... In every market that we operate with the branches we don't see any issue why we should not participate. Of course we only participate in those markets that the wholesaler doesn't want to participate, he wants to get out of the business and doesn't have a better option for their market. We don't see [buying branches] as the number one strategy for the company, but from time to time we find opportunity and we negotiate with the owner, so why not have a second buyer, a third buyer in the market? Sometimes the second buyer doesn't like that because they have a competitor, but we're trying to make very clear for our anchor wholesalers -- the ones that are aligned with us and have financial capability and success -- those are the ones in our view that should be consolidating. For them we'll always have space to grow -- in the same territories or in other territories."

ON THE TENSIONS AT THE DALLAS DISTRIB MEETING. "The way we like to operate is to be transparent. We don't like hidden agendas. When we came here we were accused of a lot of things, but we were the only ones not trying to change anything. We didn't propose the CARE Act, we didn't propose to change legislation from the national level or the local level. We thought that at some point we were in defensive mode and we had to tell people what we think needs to happen in the market. Sometimes people don't like it and we accept that. The fact is, the average feedback is not what people actually think. We get much more feedback when people don't like what we say than when people do like what we say. We also got a lot of positive feedback from wholesalers [after the Dallas meeting]. We are still open to discuss. We've had amazing Wholesaler Panel meetings every three months... we get a lot of feedback from wholesalers on what they like and what they don't like. At the end of the day, we prefer to say what what we think rather than have them be surprised because they didn't know."

ON YUENGLING'S ASCENT. "It's funny, many times we are accused of being a duopoly, but I don't know any more competitive market than the US. Yuengling has been very successful and we are watching very closely and we are testing different approaches to [competing with] them. Yuengling is not a concern, they're a competitor, and the fact that a competitor has a clear strategy we need to watch our market share and we need to watch our business. We have to earn the business every day and there's a lot of people trying to eat our lunch."

CAN YOU SELL SOFT DRINKS AND BEER ON THE SAME TRUCK? "I don't think it needs to work. In Brazil you have a very very fragmented market with very small drop sizes. The benefit for having two in the same house and the same truck is because you have seven or eight cases as an average drop size.... Soft drinks don't have the scale there. Here in the US they have the scale...."

ON GOOSE ISLAND. "First of all it has been a very successful story for us.....It is good to learn from them, for example how to bring innovation into the market and use it... One of the decisions we made was to keep the business running separate for a while and somehow that protected their performance. We've also heard time and time again from consumers that they're not worried about that [hurting goose.] The actual consumer, who is passionate and in their 20's and 30's doesn't worry if you're producing here or there. We know some of the other craft brands also produce outside their own facility and co-op with somebody else. We've been giving them more capacity and we've been adding some expertise... and learning how a very special segment of the market develops brands for that occasion. We are of course big and we have distribution all over the place and we've been more mainstream with our brands than we should in my view. It was nice to develop specific programs as opposed to doing one thing for everybody."

ON SOT TEAMS. "We have execution opportunities and we have several wholesalers that are better than others and we want to make sure we point out those opportunities... I haven't heard of anybody being punished."

ON DISTRIB CONSOLIDATION. "We don't have an ideal target, we would never draw a number. We start with a base and we'll expand from there. We also don't want to have gigantic wholesalers that cannot have that face to the market, but we think we can consolidate a lot more than we are today."

ON COMPETITIVE CRAFT IN A-B DISTRIBUTORS. "It's the decision that belongs to the wholesaler. We're competing against everyone else out there and we believe we can develop the brands. We recognize that for many years we did not develop the portfolio that we needed to compete in some of the segments, and so we'll continue to develop those brands and close the gaps. If the wholesaler feels the need to have somebody else it's his own decision, just making sure they keep enough focus and resources to our brands as they should."

BEER BRIEFS:

ABI CONSIDERS TWO FOREIGN BREWERIES. A-B InBev is looking into potentially acquiring both StarBev, owner of Czech lager Staropramen, and China's Kingway Brewery Holdings, reported Reuters. The company is one of several contender for both breweries including SABMiller, Carlsberg, Heineken, Tsingtao and Molson Coors etc.

BUSCH TO SPONSOR MAJOR LEAGUE FISHING. "Major League Fishing is among the premier organizations for bass anglers and is a natural fit for the Busch beer brand," said Brad Brown, vice president of sports & entertainment marketing, Anheuser-Busch. "We look forward to working with the league to introduce new and innovative activations to engage bass anglers and fishing enthusiasts nationwide."

Until tomorrow, Harry

"It is the dim haze of mystery that adds enchantment to pursuit." -Antoine Rivarol

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